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UPDATE 1-Norway oil fund to sell holdings on environmental concerns

(Corrects to show that Shell and ENI not placed on formal observation)

* Norway often bars sovereign wealth fund from investments

* Asks for greater scrutiny of Shell and Eni in Niger Delta

* Fund will also raise concerns with AngloGold

OSLO, Oct 14 (Reuters) - Norway's government has told its $790 billion oil fund to sell holdings in five companies because of environmental issues and expressed concern over others, including Shell and Eni, the finance ministry said on Monday.

The fund, the world's largest sovereign wealth fund, is barred from investing in WTK Holdings Berhad, Ta Ann Holdings Berhad, Zijin Mining Group and Volcan Compania Minera because their activities pose a "risk of severe environmental damage", it said in a statement.

But contrary to the recommendation of its Ethic Council, the government did not place Royal Dutch Shell and Eni on its watch list for possible exclusion and instead asked the fund to place a greater emphasis on scrutinising their activities in the Niger Delta.

"The Ministry of Finance has decided to ask Norges Bank to include oil spills and the environmental conditions in the Niger Delta in its ownership efforts for a period of between five and ten years," the ministry said.

India's Zuari Agro Chemicals Ltd was also excluded from the investment list "based on an assessment of the risk of contributing to the worst forms of child labour", it said.

The fund usually sells its stakes in companies before the government makes its exclusion decision public.

It often excludes companies and has dozens of tobacco and weapons makers on its veto list. Some of the world's biggest miners, such as Rio Tinto and Barrick Gold are banned as they have badly damaged the environment.

The government also asked the fund to raise issues about mining related environmental damage with AngloGold Ashanti but has not excluded the firm from its investment list, despite such a recommendation from its ethics council.

"We do have an ongoing dialogue with these companies and we've had for along time, over the past two years... and they've showed good results," oil fund spokesman Thomas Sevang said.